Chancery Judge Dismisses Claims Against GM Directors In Ignition Suit

A Delaware Chancery judge has dismissed derivative claims against General Motors Co. (GM) directors in a case stemming from the high-profile ignition switch defect on certain cars, which has caused dozens of deaths. The judge ruled that the suing shareholders did not adequately show the directors acted in bad faith while overseeing GM’s operations. In the opinion, Vice Chancellor Sam Glasscock III stressed that his findings relate to GM leadership’s liability to the corporation itself, not the automaker’s liability to customers. In that regard, he wrote that GM “has been and will be held liable for any wrongdoing in the engineering and deployment of these ignition switches.”

But as far as directors being liable to GM the corporation, the Vice Chancellor ruled that suing shareholders did not adequately plead that the automaker’s directors were consciously acting against the company’s interest or violating their duty of loyalty by acting in bad faith. Vice Chancellor Glasscock wrote:

The conduct at issue here, as pled, falls short of an utter failure to attempt to establish information or reporting systems, a conscious failure to monitor existing systems or conduct otherwise taken in bad faith. Pleadings, even specific pleadings, indicating that directors did a poor job of overseeing risk in a poorly managed corporation do not imply director bad faith.

The Vice Chancellor added in a footnote that the latter comment refers to the GM presented to him in the shareholders’ pleadings in the suit, not necessarily the real-world company. The Chancery lawsuit, filed in May 2014 by GM investors Burton Z. Cohan and Paul Nash, and later consolidated with several others, is one of a large number of lawsuits, as well as two congressional investigations and a U.S. Department of Justice criminal probe, surrounding the ignition switch defect that caused hundreds of crash-related deaths and injuries.

As we have written previously, GM launched its first of what would be 45 recalls in February 2014 covering nearly 30 million vehicles, 13 million of which were pulled back because of issues connected to the ignition switch. The National Highway Traffic Safety Administration (NHTSA) has since levied a record $25 million civil penalty, and announced in May it plans to continue overseeing its handling of potential vehicle safety issues for another year.

The shareholders suing in Delaware were attempting to hold the GM directors personally liable to the corporation, not for being complicit in the defect, but because the board didn’t have a mechanism to receive information about safety risks and the risk of punitive damages in pending litigation.

Vice Chancellor Glasscock wrote that the shareholders conceded in their pleadings that GM indeed had some system of oversight, even if it was not up to the “Plaintiffs’ hindsight-driven satisfaction.” It appears from the opinion that several committees reviewed GM’s risk management structure regularly and that the board was given presentations on safety and quality issues. Under Delaware law, for a shareholder to show in a derivative suit that directors failed in their oversight responsibilities, it must be pled that there was “an utter failure” to implement any reporting system or controls, or that there were “red flags” that were consciously disregarded. It appears that the suing shareholders did not plead facts to show either of the requirements. Vice Chancellor Glasscock wrote:

The very documents the plaintiffs cite demonstrate that the board and its committees were receiving reports relating the quality of GM vehicles. That is short of pleading that the board “utterly failed to implement any reporting or information systems or controls,” sufficient to raise a reasonable doubt of the directors’ good faith.

Under Delaware law the shareholder Plaintiffs in the case had a very high hill to climb before GM’s directors would be held liable for what other persons within the corporate structure did or failed to do. We know from our experience in the product liability cases that there was lots of fault to be shared by lots of folks at GM. But that’s a totally different matter.